TORONTO, Feb 15 (Reuters) - Sales of existing homes in
Canada rose in January from December and fell only modestly from
a year earlier, suggesting the housing sector's recent slowdown
hasn't developed into a full-blown correction.

Sales were up 1.3 percent in January from December, the
Canadian Real Estate Association said on Friday.

The trade group for the country's real estate agents said
that compared with a year earlier actual sales for January, not
seasonally adjusted, were down 5.2 percent.

CREA's Home Price Index rose 3.1 percent in January from a
year earlier, the smallest gain since April 2011.

Year-over-year sales began falling sharply in 2012, hurt by
the Canadian government's tightening of mortgage regulations in
July. The Conservative government took steps to cool the
property market due to fears that ultra-low borrowing costs
could fuel a bubble.

Economists have been divided over whether there will be a
U.S.-style housing crash or a soft landing in which slower sales
gradually stabilize prices.

Canadian home prices rose at the slowest pace in three years
in December year-on-year, and housing starts fell more steeply
than expected in January.

"We've seen adjustment in the housing market, we think
there's a bit more to come in the next few years. Again, I think
Canadians have listened to the message and they are adjusting,"
Bank of Canada Governor Mark Carney told CTV in an interview
broadcast on Friday.

CREA noted that if sales activity holds near levels seen
since last August, year-over-year declines will begin to fade
after the crucial spring buying season.

"Until then, the focus may remain on how sales were stronger
in the first half of last year compared to lower, but stable,
national activity since then," CREA's chief economist Gregory
Klump said in a statement.

BORROWING COSTS STILL LOW

The association pointed out home sales picked up from
December in about half of all local markets, including the major
centers of Toronto and Vancouver, Canada's two most expensive
markets.

The number of newly listed homes rose 1.6 percent month over
month in January, the first monthly increase since last
September.

Analysts noted January is typically a slow month for home
sales, making it harder to discern trends. But they also pointed
out that the outlook for interest and mortgage rates is helping
to support the market.

The Bank of Canada's key lending rate has been at 1 percent
since September 2010 and the central bank said last month that
soft economic growth and tame inflation mean an interest rate
increase is not imminent.

"With the Bank of Canada backpedaling from its tightening
bias, the risk of a reacceleration in housing remains non
trivial," Mazen Issa, Canada macro strategist at TD Securities,
said in a note to clients.

"Our base case heading forward is for a stabilization in the
housing market and we do not expect a more pronounced correction
until the bank begins to lift the overnight rate."

The median forecast in a recent poll of Canada's 12 primary
dealers, the institutions that deal directly with the central
bank as it carries out monetary policy, showed their median
forecast for the next rate hike was the first quarter of 2014.